Investing in Stocks Chapter 11
Annual shareholder return
(annual dividend + appreciation in value) / initial stock investment
Why would a corporation call its preferred stalks?
- call in their existing preferred issue and substitute new preferred stocks that pay a lower dividend - call in the preferred stocks and issue common stocks with no specified dividend
The internet is a beneficial source because:
- easily accessible - more up to date than printed material - more complete than corporate reports
For what reasons is a discretionary order advised against?
- if the account executive makes a mistake, it is the investor that suffers - it is commonly argued that the investor should be making the investment decisions
Micro and macro factors that might influence the economic value of the stock:
- the firm's financial statements - cash flows the firm is able to generate - management strategy - industry and competitive conditions - the state of the economy - the like.
Reasons why corporations issue common stocks:
- to finance their business startups costs - help pay for ongoing business activities - common stalks are a form of equity - dividends are not manditory - allow for voting rights and control of the company
What are typical changes in a corporate policy?
1) an amendment to the corporate charter 2) sale of certain assets 3) possible mergers 4)issuance of preferred stocks or corporate bonds 5) changes in the amount of common stocks
Factors that affect the decision to convert preferred stalks to common stalks:
1) dividends paid on preferred stocks are more secure than the dividends paid on common stocks 2) the amount of the dividend for preferred stocks is generally higher than the amount of the dividend for common stocks 3) Due to the conversion option, the market value of convertible preferred stocks usually increases as the market value of common stocks increases.
How does the Participation Feature work?
1) the required dividend is paid to preferred shareholders 2) a stated dividend, usually equal to the dividend amount paid to preferred shareholders, is paid to common shareholders 3) the remainder of the earnings available for distribution is shared by both preferred and common shareholders.
Secondary Market
A market for existing financial securities that are traded among investors (had previously been bought from the primary market)
Covers price movements of all stocks listed on the New York Stock Exchange
NYSE Composite Index
Stock Split
A procedure in which the shares of stock owned by existing shareholders are divided into a larger number of shares. (does not guarantee profit because there is no guarantee that the market value will go up after a split)
limit order
A request to buy or sell a stock at a specified price. - when buying stocks, a limit order ensures that you buy at the best possible price, but not above a specified dollar amount. - when selling stocks, a limit order ensures that you sell at the best possible price, but not below a specified dollar amount
Ex-dividend
A situation when a stock trades "without dividend," and the seller—not the buyer—is entitled to a declared dividend payment. Buyer starts receiving dividends in the next quarter.
Penny Stock
A stock that sells for for less than $1 per share High risk investments Ex. New companies
NASDAQ Composite Index
An index that covers price movements of all stocks traded on the NASDAQ stock market.
pre-emptive right
The right of current shareholders to purchase any new stock the corporation issues before it is offered to the general public.
discretionary order
An order to buy or sell a security that lets the account executive decide when to execute the transaction and at what price
Cumulative Preferred Stalks are
Are stalks where unpaid dividends of each quarter will accumulate and must be paid before any cash dividend is paid to the common shareholders.
Primary Market
Where you purchase financial securities ,via an investment bank representative or from the issuer of those securities directly.
Securities Exchange
a marketplace where brokers who represent investors meet to buy and sell securities.
Over-the-Counter Market (OTC)
a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange
market order
a request to buy or sell stocks at the current market value
Blue-chip stock
a safe investment that generally attracts conservative investors ex. bell canada, RBC, suncor energy
Arbitration Clause
a signed statement in which clients promise to submit any complaints to an arbitration board, generally preventing a client from suing an account executive or a brokerage firm.
Efficient Market Hypothesis (EMH)
Contradicts technical analysis since it states that future prices cannot be predicted from past trends and patterns. The prices of all assets fully reflect all available information currently.
Conversion Feature
Convertible preferred stocks can be exchanged, at the shareholder's option, for a specified number of shares of common stocks.
One way preferred shareholders can protect themselves against omitted dividends is to purchase
Cumulative Preferred Stalks
Cyclical Stock
follows the business cycle of advances and declines in the economy. When the economy expands, the market value of a cyclical stock increases; when the economy declines, the market value decreases. ex. basic industries, such as automobiles (FORD), steel, paper,
The two views used to evaluate stock price change:
fundamental and technical analysis
Amount of dividend payment depends on
how well the company is doing financially; how much their earnings are in a given year.
Demand for a stock changes based on
information released about the firm or its future prospects
NASDAQ dealers are referred to as
market makers fxn: to match your buying offer with a security that is for sale
Types of Stock Orders (order to buy or sell)
market order, limit order, stop order, discretionary order
Income stalk
pays higher-than-average dividends ex. utility companies
Where to buy/sell stalks:
primary market, secondary market, brokerage firms/account executives
Two types of corporations:
private & public
Most corporations pay dividends on a _____ basis
quarterly
In comparison to common stocks, preferred stocks are:
safer investments that offer more secure dividends
The yield on preferred stocks are often ______ than corporate bonds
smaller
Corporations experiencing large swings in earnings declare ________
special year-end or extra dividends in addition to their regular quarterly dividends
T or F: Financially unstable companies such as Amazon or Facebook retain their earnings for research and development of their company
true
Before choosing and account executive
you must already determined your short-term and long-term financial objectives
How can common share holders vote?
In person or by proxy (transferring their votes to another shareholder if they can't be there in person)
Why purchase common stock?
Income from dividends Changes in stock value (growth) Possibility of Increased Value from Stock Splits
What types of stock are traded on the NASDAQ market?
Internet and technology stocks (high growth potential companies)
Growth Stock
Issued by a corporation that has the potential to earn profits above the average profits of all firms in the economy. Generally pay out less than 30 percent of their earnings in dividends. ex. growth companies, apple, MK, US Steel
Large-cap Stalk
Issued by a large corporation that has a large number of stocks outstanding and a large amount of capitalization. Companies listed in the Dow Jones averages.
What's more secure: large cap or small cap?
Large-cap
Derivative securities are listed on the (ex. options and futures)
Montreal Exchange
Most OTC securities are traded through
NASDAQ
Most common stock splits are:
2-for-1, 3-for-1, 4-for-1
You should compare the annual reports of a corporation published over the past ___ years.
3
Most forms distribute between _____% and _____% of their earnings to their shareholders:
30-70
Bear Market
A bear market occurs when investors are pessimistic about the nation's economy and sell their stocks. Because more investors are selling their stocks, the value of both individual stocks and the stock market as a whole declines
commission charges
A charge that is usually 1.5-2% of the transaction amount of a bought or sold share. Charged by full-service or discount brokerages. Not charged by online brokerages.
Private Corporation
A corporation whose stalks are owned by few people and not traded on the open market
Public Coporation
A corporation whose stalks are owned by many people and traded openly on the market
Earnings Per Share (EPS) of a corporation
After-tax earnings / number of outstanding common shares
Participation Feature
Allows preferred shareholders to share with the common shareholder in the corporation's earnings
SHOULD YOU USE A FULL-SERVICE OR A DISCOUNT BROKERAGE FIRM?
Depending on how much help you need make your decision. If you have little experience you will end up paying more for add-ons to the discount brokerage and might as well purchase the full-service.
What's the difference between a full-service and a discount brokerage firm?
Discount brokerage firm charges lower commissions and offers few services under its charging price. Further services can be purchased for an additional fee.
If a stock is traded around the record date the following rule is followed:
Dividends remain with the stock until two business days before the record date. If the stock is bought anytime within two days before the record date it will sell ex-dividend.
The best indicator of the stock market's performance is known as?
Dow Jones Industrial Average (DJIA) aka the Dow
Churning
Excessive buying and selling of securities to generate commissions. (illegal, but hard to prove)
Investment bank
Helps financial firms sell new security issues, in order to raise funds (charge premiums from the financial firms for their services)
Security Regulations
Provincial Regulations: registration, disclosure, enforcement Self-Regulatory Organizations (SROS): know your client rule, confirmation rule
What's the most important a preferred stocks investor enjoys?
Receiving cash dividends before common shareholders are paid any cash dividends. (important when a corporation is experiencing financial problems)
Defensive Stock
Remains stable during declines in the economy. Many stocks that are classified as income stocks or blue-chip stocks are also classified as defensive stocks.
Stocks are traded in round or odd lots. Define each
Round lot: 100 shares or multiples of 100 shares or a particular stock Odd lot: less than 100 shares of a particular stock
The premium indicator of equity activity in Canada, known as __________, covers 95% of the Canadian equities Market
S&P/TSX Composite Index
What are some ways to judge how the market is doing?
S&P/TSX Composite Index Dow Jones Industrial Average NYSE Composite index NASDAQ Composite index Standard & Poor's 500 Stock Index
The best benchmark for large-cap stocks and one of the best overall indicators of market performance.
Standard & Poor's 500 Stock Index (S&P 500)
Technical Analysis
States that changes in investor sentiment are responsible for changes in trends, and that the value of a stock can be predicted by extrapolating price from historical patterns.
Small-cap Stock
Stock issued by a company that has a capitalization of $150 million or less
Callable preferred stalks
Stocks that a corporation may exchange, at its option, for a specified amount of money
In Canada, the national stock exchanges are owned and operated by
TMX Group
Emerging firms list their shares on the
TSX Venture Exchange
beta ranges
The beta for the stock market in general is 1. Most stocks have betas between 0.5 - 2.0. Conservative stocks = low betas Speculative stocks = high betas
Preferred stocks are often referred to as "middle" investments because
They represent an investment midway between common stocks (an ownership position) and corporate bonds (a creditor position).
Large-cap firms list their shares on the
Toronto Stock Exchange
Capitalization
Total amount of securities (stocks and bonds) issued by a corporation.
T or F: The dividend amount paid on a preferred issue can also affect the market value of the stock.
True
Bull Market
When investors are optimistic about the nation's economy and buy stocks. the fact that more investors are buying stocks causes the value of both individual stocks and the stock market as a whole to increase.
Financially secure companies such as __________ companies and other financially secure companies may distribute up to 80-90% of their earnings as dividends.
Utility
Fundamental Analysis
Values stocks by looking at micro and macro factors that might influence the economic value of the stock.
What kind of control do common share holders have over the company?
Voting rights at the annual meeting to decide on the major changes in corporate policies.
Initial Public Offerings (IPO)
When a corporation sells stock to the general public for the first time. Classified as high-risk investments
stop order
aka a stop-loss order With a limit order, orders by other investors may be placed ahead of your order. If you want to guarantee that your order is executed, you place a special type of limit order known as a stop order. Is an order to sell a particular stock at the next available opportunity after its market price reaches a specified amount.
Account Executives
aka stockbroker = a licensed individual who buys or sells securities for his or her clients.
beta
an index that compares the risk associated with a specific stock issue with the risk of the stock market in general
Annual dividend return
annual dividend / initial stock investment
Capital gains return
appreciation in value / initial stock investment
By exercising their pre-emptive rights, shareholders
are able to maintain their current proportion of corporate ownership and management over the company
Commissions are charged when you
buy AND sell a stalk
Price-Earnings (P/E) Ratio
company's year-end stock price / earnings per share (this ratio is referred to as the trailing P/E ratio)
Corporation Annual Reports give information on:
the company's management past performance goals
Record Date
the date on which a shareholder must be registered on the corporation's books in order to receive dividend payments
The market value of a stock depends on
the demand for the stock
If the firm is dissolved/declares bankruptcy, preferred shareholders have first claim to
the firms assets after creditors (including bondholders)